Separate ADP/ACP Testing of Otherwise Excludable Employees

[MWeddell]

For testing for the plan year ended 12/31/1998, the plan is testing employees who otherwise could be excluded under IRC 410(a) separately. In other words, those with less than a year of service (including any entry date assumption) and those under age 21 are tested separately.

An employee was hired April 1997, earning over $80,000 during the rest of 1997, and became eligible to participate in the 401(k) plan on 5/1/1997. The employee terminated employment February 1998. For the 1998 testing, is this person considered as having < 1 year of service because he terminated employment before 1 year of service, or is this person tested with the group of employees with at least a year of service because that's what he would have had at the end of the plan year? Alternatively, is either interpretation reasonable considering the vague regulatory guidance on this issue, as long as we're consistent for all employees in that plan?

Yes, I realize the rules change effective for 1999, but my question relates to the 1998 rules.

[Disco Stu]

Yes, this person would be included in the otherwise excludible group. Had the plan used the statutory max for participation, her participation date would have been 7/1/98. Since she terminated employment prior to that, she should be counted in the otherwise excludible group.

Sounds like she's an HCE for 1998 though, so maybe that doesn't help your test so much.